Five Fundamentals for the week: Explosive Middle East, ECB decision and US Retail Sales stand out

• Mid-East tensions could keep markets moving all week.
• The European Central Bank is set to cut interest rates as concerns of an economic downturn grow.
• US Retail Sales will provide an update on the health of the US consumer after the blockbuster jobs report.  

Even on a bank holiday, markets are on the move. Concerns about Chinese stimulus and the Middle East stir markets, but the calendar offers several important events with the potential to shake things up. Here are five fundamentals for the week starting on October 14.  

1) Fears of an Israeli strike against Iran move markets

The US will send Israel its THAAD defense systems. These advanced capabilities will allow Israel to withstand another Irani missile barrage – which could come as a response to an expected move to hit Iranian military or oil installations. The American move raises fears that an escalation is imminent. 

Such concerns support Oil, whose shipping could be at risk, and Gold, a safe-haven asset. The US Dollar (USD) and the Swiss Franc (CHF) are additional beneficiaries. 

Tensions keep these assets bid, but a limited Israeli attack in Iran could trigger a sell-off in these assets – a "buy the rumor, sell the fact" pattern.

However, there is a risk that an attack would drag the US into a direct confrontation with the Islamic Republic. 
Mid-East headlines will continue rocking markets throughout the week. 
 

2) Markets want more Chinese stimulus after underwhelming weekend

A highly anticipated press conference in Beijing over the weekend yielded more promises – but no numbers that markets could chew on. This vagueness triggered a "buy the rumor, sell the fact" response. However, it is not the end yet.

China is the world's second-largest economy, and authorities have been pumping out various announcements in recent weeks, mostly focused on the monetary side. Additional help from the government in the form of fiscal stimulus may still come. 

Any piece of good news – or reports of an upcoming announcement – would boost stocks. A lack of any of these could weigh on them. 
 

3) UK CPI watched after the surprising bounce in US inflation

Wednesday, 6:00 GMT. The Bank of England is set to cut rates in its next meeting, but there is uncertainty about the pace – and fresh inflation figures will set the tone. After hitting 2.2% in August, another decrease is on the cards for September. 

Investors will also watch core CPI, which is set to decline slightly from the relatively high rate of 3.6%. 

Apart from rocking the Pound Sterling (GBP), Britain's inflation data will likely shape expectations for the European Central Bank (ECB) and perhaps also the Federal Reserve (Fed). The ECB is set to cut rates by 25 bps on the following day, and there is a correlation between UK and Eurozone inflation rates.

The American angle is also of interest after recent US Consumer Price Index (CPI) data showed a surprising bounce. Is inflation rearing its ugly head again?
 

4) ECB to cut rates and could promise more

Thursday, decision at 12:15 GMT, press conference at 12:45 GMT. After pausing in July, the European Central Bank (ECB) slashed borrowing costs in September. It will likely repeat the move in its October meeting.

ECB Depoist Rate. Source: FXStreet

Coming only five weeks after the previous gathering, another cut would imply growing worries about the European economies, especially Germany. A series of announcements of layoffs have caused concern that the drop in inflation is not isolated but rather a result of a wider downturn.

ECB President Christine Lagarde will hold a press conference after the decision, and her tone will be critical to the direction of the Euro (EUR) and the mood about the global economy. 

A signal that the Frankfurt-based institution may further lower rates in December would hurt the common currency and hit global stocks, while a more confident message would send the Euro up and stabilize markets. 

Lagarde may say that the next decision, due only in December, will hinge on the fresh forecasts the ECB staff provides. Nevertheless, doves seem to be gaining ground as inflation falls and unemployment fears grow. 
 

5) US Retail Sales may disappoint after three consecutive beats

Thursday, 12:30 GMT. Never underestimate the American consumer – but every trend also has a countertrend. Some two-thirds of the world's largest economy comes from consumption, making this report significant. 

After the robust Nonfarm Payrolls report, there is room for optimism about consumption. The economic calendar points to another increase in Retail Sales. 

Bond markets currently price a high chance for a small, 25 bps cut, at the Fed’s next meeting in November.

Target rate probabilities for the November 7 meeting. Source: CME Group.

However, there are three reasons to be wary of a weak Retail Sales report.

First, the indicator has beaten consensus three times in a row, and that could mean a disappointing one this time. 

Secondly, Americans will soon be going to the polls, and political anxiety ahead of the presidential elections may limit their consumption.

Third, the bump up in inflation last month may have held back some consumption.

All in all, there is room for a downside surprise, which could send stocks and the US Dollar down, while boosting Gold. 
 

Final thoughts

As discussed, two of this week’s big themes do not have a fixed date, which means they could come at any time and trigger sharp reactions in markets. Trade with care.